The Financial Roadmap For DTC Success (With Drew Fallon) transcript

so like if you don't have the ability to understand the hour that your brand starts to lose money you are doing it wrong the technology exists today for you to be able to know that and so once you know that then you need to go and make changes and the answer a lot of times is just to stop spending Drew Fallon is the former CFO and COO of mad rabbit and more to the point of this conversation is the CEO and founder of Iris Financial software for e-commerce we're going to talk about what it is really what we're going to talk about is the financial lessons you need to know to operate your e-commerce business what mistakes are you probably making if you're anything like the other people that Drew sees with his big Financial brain of his we're going talk all things Ecom Finance that's really the point of it I don't need to draw it out let's jump in what's up Drew how are you doing well Andrew how are you thanks for having me on man uh my pleasure I'm a I'm a longtime Twitter follower I you you probably don't even know that but i' I've like like you no I know that I've been I've been no I know I know that I've been looking at your stuff for a long time too we we've never even met before this right now so it's uh it's great to finally talk well it's just like uh that guy's smart let's talk to him so you can just tell over a long enough time over enough tweets you can tell when somebody is smart yeah exactly yeah you can tell who you actually like yeah yeah um cool man so hey um I I gave the intro to tell people your bonafides but what um uh tell people a little bit about mad rabbit and what you did there uh first and then talk about what you're doing now uh because you we actually haven't talked about this but I have a number of e-commerce friends who are mutual friends of yours who have leaned on you for a very specific set of help in their business uh that includes the guys at pretty boy that includes my friend Sarah Moray from curri uh and both of all of whom who've been on the show before um and uh and all of whom I've hung out with before in IRL so um so everybody speaks glowingly uh about the influence you've had on their business which is awesome and uh but yeah give people a little bit of your journey and then we could talk about uh a little bit more about kind of what you're doing now and and why I thought to have you on the show yeah yeah I've um so I've been I've been in this world old for probably eight years now um I started like back in the day like you know when when it was fun back in like you know 2018 I think it's 2016 really um was when I first started doing like Drop Shipping and all that kind of stuff um and then uh eventually I got uh you know pretty involved with with Matt rabbit as the founding CFO coo there um you know worked there for four and a half years or so um at that brand I was leading all of the financial infrastructure so I think of that as like the fpna motions the accounting stuff uh I was also in charge of a lot of the demand planning Logistics Etc um also L all the fundraising efforts for Mad rabbit so um we were series a backed uh company raised about 20 million total and combined debt and equity and so um had a really good time growing mad rabbit it's an awesome brand we had we had a ton of fun um I think you know where where Iris kind of got really even more exciting for me as an individual um was just sort of like the applications that uh technology are now enabling specifically these two systems called open AI that everybody knows um and one that a little bit is less common called dagster which is a new elt technology um and we can talk more about all this stuff but basically I saw a a very compelling convergence of market demand and Technology sort of come all at once where people wanted to really understand their profitability on a more deep level and a more actionable level um and the technology actually made it made it possible at that point in time and so um I moved on from from Mad rabbit very amicably still a huge cheer cheerleader for for the brand it's going to do great everyone's going to everyone's going to win on that one um but you know I wasn't a real founder of that business right and so um I you know felt ready to kind of move on to my own journey and I and I took the full-time plunge um into into Iris at the uh at the end of 2023 so it's still very fresh we didn't even really come out of stealth mode until five weeks ago or so but you know since we did announce it uh the response has been resounding my my calendar is uh is pretty brutal um but it's all with with with good things so um Al yeah I'm excited to dive in I think you know I gained a pretty good understanding of you know how we were running mad rabbit but what's even more interesting these days is being able to see you know dozens of Brands and actually have you know a perfectly laid out Financial operating system of of these you know these companies and so you start to see a lot of of things that people are doing really well uh you see a lot of things that people are doing a little bit less well um and I'm I'm excited to have this conversation because I think part of the value that you know Iris can bring into the ecosystem is just helping people optimize in different areas and so um you know creating data sets that will help people do that um is something that we're really really focused on because there's a lot of lwh hanging fruit in a lot of these businesses as I'm sure you've seen as well yeah probably with less Clarity than you I I I try to stay really financially connected to what's going on in businesses I think about you know I'm I'm working with media buyers and cretive folks to drive adspend overwhelmingly but I actually end up playing a role of like a like a adviser to the CEO across how they're thinking about their dollars in general and so I end up getting into all kinds of parts of the business and I think always trying to do that with an eye towards essentially Enterprise Value like at the end of the day what everybody's trying to do is drive Enterprise value of their business that that's what they really care about they don't care about bid caps they don't care about creative testing they don't care about Opex per se what they care about is making creating Val buiness business so like it that is something that I think like you know I'm sort of running everything through but there's a level of detail and sophistication that I just don't have it's just not my background and so I part of the reason I wanted to talk to you was I think the move from conversent with the DDC space coaching some friends running a brand internally yourself in the Executive Suite and then going over to financial software founder suggests to me a Viewpoint that I think is interesting which is like oh you you see um a need in the market for this in even your limited experience now you see it even more because you're signing up brands for your software and all that um and and that's like man I always just want to go like okay what do you see what am I missing probably without even knowing it uh for me and my clients then what are like people who are listening or listening to or watching this what are they missing financially so like you mentioned one thing right away which was like lwh hanging fruit for the goal of real action ability towards your profitability right like and so you know I I don't know if you want start by just talking about like sort of the problem that Iris solves specifically um or maybe maybe like what you see as like the core issues what is yeah maybe let's start there what is the what is the lwh hanging fruit of uh that you can actionably attack around profitability uh what are Brands missing so I think like what brands really ultimately are missing is just like a centralized Warehouse effectively for all their brains all their brands data that helps them understand financial performance on a real-time basis right so like and and and it kind of comes back to your point around uh Enterprise Value right so like you know from 2010 to 2022 you know all we did care about was Raz and cost caps and all that [ __ ] because that that's what created Enterprise Value if if you could grow Revenue your business was going to be valued on Revenue um and you were going to create Enterprise Value that way um since the end of you know really 21 I think is kind of like where the macro took a big turn and now all all of a sudden that Enterprise is no longer derivative of Revenue it's actually derivative of free cash flow in in iida um and so what do you need to do in order to engineer your business in a way where it's going to be valued incrementally higher based off of How It's performing well you need to understand profits okay and so like there was all of this and I really liked um the I forget it was some podcast where they called it uh going from margin Tech to or from marketing Tech to margin Tech um and I think I think they totally I think it was uh Taylor holiday and maybe Sean Frank totally nailed it like that's exactly like where the next wave is going to be and so you know the problem that iris is is solving is that one right because you need to understand as an e-com operator like every single day is extraordinarily different right like at mad rabbit like our weekends could be double sometimes our weekdays okay and so like are you making more money on those weekends when your revenue is double are you making less money because you you know spend the same cost per click on Google and there's 100 more clicks and your contribution Market just gets destroyed by it so um basically you know these these modern consumer Brands every dollar that transacts in on and around the brand occurs digitally right like you have uh even EDI Integrations that feed into Walmart Target Sephora whatever like in the cloud uh your payroll is on the internet Shopify and Amazon are most certainly on the internet like the data points are available and so iris is solving the data orchestration problem which is centralizing all of those inputs and putting them you know contextually in a way that helps you understand hey how are we doing and then B how do we plan to continue to do you know good if it's good or better if it's bad um and so I think that's kind of like one of the main things that is differentiating about us and why I think you know the response has been so powerful um has really been around like actionability right so like there's this idea where like business intelligence tells you what's happening I consider fpna to be the plan based off of the the business intelligence right and so we we sit in sort of the fpna stack where it's like okay let's see what's going on and then let's plan for either to continue what's going on if we like it or to change what's going on if we don't like it kind of a thing you've heard me talk about more Staffing on here they have particular expertise in the area of supply chain they've built Supply chains especially in China for lots of e-commerce businesses already and they are putting together a webinar that is really going to help you that you do not want to miss the webinar is called transform your e-commerce supply chain into a revenue stream Five Savings strategies that deliver results in three months and I'm serious when I tell you I do not know better qualified supply chain experts to weigh into how you can make your supply chain more efficient and more profitable in your business than Lara gavara the CEO of more Staffing so there is a link in the show notes to go register for that webinar you do not want to miss it like Supply chains are way under optimized in e-commerce businesses consistently people are are on too long of terms they're paying too much cash up front and they're paying too much for their products in ways that are solvable Laura and her team can help go sign up for that webinar it is totally free of course nothing like that going there go check it out Link in the show notes to go register for that webinar you are going to not want to miss it what is rising to the top as you start to get Brands into Iris and as you start to see all of these data points uh what are the areas that you think brands are I mean you just you just gave the hypothetical example of a bunch of more Google clicks over the weekend um what do you what do you think are the areas that immediately rise to the top where it's like the this is these are Financial mistakes that are like the biggest wastes of money in the business because ultimately like one of the best ways to make money is to lose less of it um and so like if we if we can just like Shore that up uh then you can go really really far I think there's a lot of wasted dollars out there um I can think of a few but I'm curious like what are the things as you get more and more data that is like this is consistently a place where people are just spending money they should not be spending or reverse comput too where they're not spending money they should be spending so I actually like the way that you phrase that like the some one of the best ways to make money is not to lose money and I think like what a lot of people you'll see is like so they're driving this ship right and for the most part it's they're driving it pretty blind right and if your goal is to make you know 10% profit every single day um and you start to go from 10 to eight to negative3 to10 then all of a sudden you're like you're so far off course and like I think the biggest mistake that people make is like once you dip into the red is not identifying it immediately and making changes so like we'll see people you know and this is you know Iris or not but like and you know we unfortunately made these mistakes in Mad rabbit where it's like no just give the ad set a little bit more time or like we're launching this creative like just let it you know let it learn it's in the learning f like whatever like all that [ __ ] so like if you don't have the ability to understand the hour that your brand starts to lose money you are doing it wrong the technology exists today for you to be able to know that and so once you know that then you need to go and make changes and the answer a lot of times just to stop spending right so like there's a ton of pressure you know back for the last 12 years or whatever just to continue to grow month over month year-over year you got to grow you got to grow you know people like there's so you don't have to grow every single month month over month right like you obviously want to grow your business in a steady you know sustainable manner um but once you start like kind of operating at like that marginal return that's like too expensive to continue to grow you're just literally burning money and like the capital markets like to our earlier Point around Enterprise Value no longer reward that behavior and like yeah like look like 2021 like yeah [ __ ] spend as much as you want and grow as much as you want I don't care how much money you lose like you can sell for 5x sales and you're all good like these days it's like you're not going to attract Capital you're not going to sustain yourself you're just literally like torpedoing the business and so the number one thing I think is like people being too willing to be in the red contribution margin or net income basis like certainly you know you should not be in the red on a net income basis um if like you want to basically understand like when am I when am I starting to lose money and as soon as I understand that how do I change course to actually go and make money and a lot of times the answer is just [ __ ] stop spending honestly like you know you don't have like as long as you have some element of recurring Revenue like you're going to experience margin expansion in that sense and like you don't really have to like force the growth is kind of like you know the first thing that comes to mind as far as like day-to-day operational mistakes and I think just to drill drill it home a little bit more is like that is where finance and marketing that happens the most often when finance and marketing are extremely disconnected inside of the brand so once you connect finance and marketing Finance can basically be like hey you're being stupid and then marketing can be like okay let's you know change course so I think that's that's like the biggest thing and and candidly like I'm saying it in a little biased sense because that's you know the biggest value prop for Iris as well but like I truly believe that's like the the number one thing that people get wrong is like just spending at the wrong level it's interesting I mean the answer then is overwhelmingly for people ad dollars it's their ad dollars is where the waste is and it's funny though because the well I mean you look like you're gonna maybe correct that well so no I think ad dollars is is one variable and a multivariable equation right so like the the problem is that like you know the existing Technologies within the ecosystem are not varying the mult the multiple variables right so like if you have a discount going on for Memorial Day uh okay well that changes our or me you know in order as like you know break even or or profitability or whatever people people make this mistake all the time they don't change their targets despite that they're selling the product for less money and taking a thinner margin I watch this happen constantly yes exactly so like you have uh you have discounts you have refunds you have uh you know brand spend if you not including that in like contribution margin which is like silly um you have like all these different inputs and people will just be like okay like 2 . 4X is my break even row as uh and you know anything above that is profits and it's like okay well then you strap on like a huge discount and you're looking at like a gross me and it's like well no like you're losing money and now you're doing that stupid [ __ ] that I just said not to do which is like you're going into the red and you're continuing to go into the red and then you're not going to realize it until three weeks later when your accountant comes to you with the closed books for April and be like dude like you just completely Miss on this entire p&l goal like you just botch this and then you can only do that so many times before you die that's so right I think I think the Baseline mentality you're expressing here which is just like hunt it's what I hear you saying is hunt down wasted dollars in your business I I remember reading The Outsiders have you read that book uh like the pony boy one no no no no the other one uh yeah there's oh that's the greasers um no I don't know The Outsiders uh no The Outsiders is a pony boy one but there's an Outsiders uh it's like a profile of like overperforming CEOs it's like who are the CEOs who over the longest term created like if you had given them a dollar uh or $100 let's say over the longest term who would have maximized your return on $100 most consistently as measured by public market public by performance against public markets so basically they took like long CEOs who over a long time created really valuable companies over and over and over again and one of the things that comes up and it's like 10 profiles great book recommended um one of the things that that comes up over and over and over again is that lot of these uh CEOs and uh I was going to say guys that's all in that book it's it's all guys and one female CEO because over a longer time period so so so be it um uh from the past but the um the thing that comes up over and over is uh is they're cheap like they just like they hated wasting wasting money on like they they were not flying around in PJs they were not uh they were not like you know yeah creating super fancy offices and all this kind you know at least in those days like a lot of them just ended up like and and it's basically that mentality which is just like stop losing money and I I'm in the I mean I can speak from my experience especially on the media buying side which is like it is so tempting every time your ads are not getting the return you want to go just leave them on we'll fix it we'll like we gota we gota we got to get some data back from our spend that's kind of the cost of doing business and people cannot deal with the idea that like actually all you're doing is making it go redder faster uh every time you do that and and it is better to not spend the money than to lose more money even if it means that you're going to have have you know you're not going to be able to cover your Opex n this month you know well look if you spend into the red more you're actually going to make that loss even bigger not not not better you know and so um so yeah it's it's very hard it requires a lot of discipline like I think what you need to do is build into Iris um like a notification but not a notification it like makes your cell phone scream at you you know just like Bells go off and it and it and it your an alarm goes off on it and it's just like stop doing this what as soon as you overspend by $100 we literally we literally have that you can like set your parameters and like if you like start to lose like x amount of dollars you'll get a slack message that'll be like [ __ ] stop yeah that's that's exactly right you know um it's funny our friends at pretty boy they told me that uh at one point like uh they were overspending at the end of last year and they were talking to Taylor holiday about it and Taylor was like I I don't know I'm a little hazy on the exact details but it was Taylor sold him something like I'm going to stop responding to your DMs if you keep spending this money you have to stop right now cuz you're losing money like he's like like he just like basically threatened them you know he's just like yeah I mean well it's like yeah I yeah that's I mean kudo's a Taylor it's like dude like if you don't listen to me I'm not gonna keep giving you [ __ ] advice and like Ben eventually I'm sure yeah they turned it around it really helped them I it's exactly what you're saying they they they got the warning and they did it but it's so hard to do and I'll tell you the the the people listening to this who should be the most careful right now and like self-reflective is if you have raised outside Capital if you if you've brute strapped you you tend my experience with bootstrap Founders is they tend to behave this way a little bit intuitively because they started with no money and it was their dollars you know and so they there's like an ownership over it and so they just hate wasting money and they and actually sometimes boost trrap Founders I have to be like hey like you actually need to probably get a little more aggressive put some more money into play like it's okay to like uh you know pay an influencer to to give you some creative at some point you know but but but Venture but people who have raised money I've they have a very hard time even if they're telling themselves no I'm gonna make the switch later to profitability I know I'm gonna be I'm gonna be valued on profitability it there's just something that happens where they have such a hard time going like the time to make that switch is now like you know when when it's time and maybe it's not yet for for them but like if you've raised money like you need and you're not profitable now you've at some point you have to be profitable or you die and you will not be able to keep raising money and and so yeah you have to be able to to kind of uh yeah pull that kill or hit that kill switch at some point yeah I mean that's that's like I think I think you saw and you continue to see honestly carda came out carda puts out a lot of good data I think his name's like Peter Walker he's like the head of insites at CA which is like a uh cap table management software and they've got a lot of great uh data around fundraising and one of the things that's been like abundantly clear for at least a year probably 18 months is just the amount of down rounds that startups are facing you know in general and like look like even if you get a Down Round you should consider yourself pretty lucky like these are tot like pay to playay cram down rounds but like at least you get another shot you know and the founders that you know uh espec especially in Ecom which a lot of investors right now won't touch with a 10- foot pole um you if you didn't you know change your course a year 18 months ago like you probably don't even own your business anymore if you raise Capital um you know and it's like and like I think you know what's what's what's what's nice about Ecom though what what's nice is that you have so much agility dayto day you have so many levers to pull you have so much control and so I think you know the way that you framed it is correct I would I would frame it even differently which is like as long as you perform according to plan it's okay like you just don't want to lose your plan like if you plan to spend a million dollars a year on private jets and like you have 25 million of contribution margin sure like that's okay like I'm not telling people to like hey like you know don't take that client out or or whatever as much as like okay just make sure that like if you do like you know how that fits into the grand scheme of the rest of your business I think that's that's really good and and it actually highlights something else that I think uh I see really good operators do is they plan really carefully and they they plan the entire p&l you know and they they budget the whole thing for exactly this reason because I was actually going to ask you this question like there's there's almost like what seems to me to be a potential overcorrection happening now which is which is like an optimization for profit so much that it actually becomes a little bit shortterm uh that like that like people behave like their business won't be here any year um as if like the awareness that you drive now the customers that you drive now the word of mouth that you drive now all those things um or like they also behave like like getting clicks and awareness and customers and stuff now does nothing to make your Black Friday bigger or something like that and so that's like the the trade-off like um I think I think most people probably are sit in the place where they need to spend less bad dollars I think that's probably true but I think it's Al possible to start behaving this way and to be like oh sweet we generated a really healthy bottom line and you end the year with like $300,000 in bottom line in a really small business all told now look I would be happy with that because I I'm not trying to Big that build that big of a business but like but if you're trying to build a bigger business at some point you actually probably have to be a little bit more aggressive and think about the long-term value that you're creating with some of these things but again to your point what I would say is follow a plan then you know if that means raising money to get to from point A to point d or whatever then you got to you got to have a plan on points B and C it's not just spended to Oblivion yeah and and you know if it's raising money that's part of it okay like even even if you don't want to raise money like let's let's let's make a financial plan for the year let's let's be aggressive let's grow the business let's make sure that our balance sheet can support it right so that's like the other thing that people just completely [ __ ] miss in this world because like look they don't know what they barely even know what a balance sheet is and like I don't blame them for it um but like look like like you should have like a cash flow model you should have like a balance sheet forecast like forecast casting your p&l for the year does not take into account any sort of working capital um it doesn't take into account like any sort of like outside Capital right in terms of like you know cash from financing or something like that and so it's like you can forecast a break even p&l all day but like if you have like pretty poor Capital efficiency like on the on the balance sheet side like you'll run out of money just as fast so like you know like you can be unprofitable and if you have like a really well orchestrated cash cycle you can go all [ __ ] day and just grow and grow and grow and like pay off everything that you have with revenue and like you know I don't advise that because it only lasts so long but like there there's a balance right and and ironically the balance comes from the balance sheet where like roll my eyes a little bit but like you can do the p&l you can do the cash flow statement and you can say Hey Okay I want to grow Revenue this much but that's gonna make me burn this much money okay like am I okay with that ending cash balance like am I okay with ending the year with half a million dollars $5 million in cash and if so what did I get out of you know losing x amount of dollars did I get 200% growth year over year I don't know maybe that's worth it you know and then you just got to continue to model and continue to plan and continue to execute against plan but you cannot do one portion of a of a financial plan because it is a very dangerous way because look I mean let's say you forecasted a p&l where you're growing from 500k a month at 10% IA you know and then you go from 500k to five million a month but your iua goes down that could be awesome that's a lot of [ __ ] growth that's a lot of inventory that's a lot of working capital that could kill you you know even though on the p&l you're like hey look I I made you know 5% for the year on on $20 million like I'm rich no like you're all your current assets are in inventory and if you're growth stops you're completely screwed and private Equity will happily buy you for pennies on the dollar so I think totally agree uh I think I think it's very critical to understand the way that the balance sheet will look with growth and people a lot of times will kind of neglect that the way that I've solved this for uh clients of mine increasingly is like they all already work off a 13we cash flow they um and then I you know build cohort forecast um and that and it really is beyond customers it's like it's a full p&l forecast basically to try and look at where the contribution margin comes in at every month where the bottom line comes in at every month that allows you to see some like hey you know you think of a highly seasonal brand like yeah we're going to lose money for three months and you can see it and if it's that's plan that's great if the customers are whatever you know then and go or it's just the cost just the reality at an earlier stage of the business it's harder to do it and uh you know for exactly the reasons you said maybe you can't buy as much inventory as you'd like to make the moment as big as you could or or you know it's too risky or whatever and so yeah there's all kinds of scenarios that play out but then what I've just begun to do is literally just tie the two documents together so that the in the same forecast which gets updated you know as often as possible it's tied directly to a cache forecast so the cohort forecast Powers um Powers the p&l forecast and or that is a p&l forecast basically and then it's just tied directly into here's the timing of the revenue that we're going to see in Shopify here's when it's going to hit our bank account and then the actual operator can go in and uh and enter in you know the cash movement from there here's where all that stuff and here's where your credit cards come in what you're describing what you're describing is like just like a classic three statement model like I mean that's like that's literally how we do it that's literally how we do it in banking you know like that's that's the correct way to do it um like the cash flow model the 13B cash flow model that everybody talks about it's it's a balance sheet model right like it's it's an accountable accounts payable it's a work it's a working capital model right and so part of the inputs in a working capital is accounts receivable which you know we struggle to call it accounts receivable because it outstanding for a day or two on shop Pi but like that's your accounts receivable model right that you are put for your clients you put the the accounts receivable model and then the accounts payable model would be like you know taking [ __ ] out of build like Iris has a 13 cash model and we just pipe everything out of like your bill.com we just plant it into the weekly outflows and then we do the same thing where we're modeling like new customer acquisition and returning customer forecasts and plopping into their accounts of receivable so you're talking about like a monthly balance sheet model and then you're just drilling down into it and you're having controls over every single in andout of dollar and that's where the controls part of the financial infrastructure comes in is like okay like every time we send a wire over 50 Grand like do we have like a double sign off on it or like how do we make sure that like you know the cash is staying tight in the business um yeah I'm glad to hear that that's the way you do it because that's exactly how hard and it's not it's not it's it takes a bunch of time and effort and it's not what people think about and almost nobody got into their businesses because that's what they love to do like you are the exception here Drew like you you you obviously love it but like people love their products that's why they started you know they designed something they made something cool they saw a gap on the market and so it's actually and which also means it's not just about building the document it's about like learning the me carving a mental pathway that actually gets them thinking about what that means so it's not just numbers on a spreadsheet but like okay here's what we have to do here's what the decisions is here's when to spend more here's when to spend less like all those things and because it's it's Step One is build the model but then the next step that I've found also is can be challenging with clients sometimes is to actually get them to go like oh this is actually the map and compass for the business and if I want to get to where I'm trying to go like oh my gosh I need to live and breathe off this document you know so something yeah anyway making that easier for people and making that a little less to manage and a little less overwhelming feels like a giant win to me yeah are you saying that the iris uh so go ahead go ahead uh I was say I like the map and comass analogy always say when somebody shows me a financial model or you know any Finance person a financial model it looks like a bunch of numbers but we see words we see sentences you know like you can actually like depict like what like this is a story right like when I see you know a p&l that's you know with Revenue going down and losses going up and and cash you know going down it's like okay well there's a million different stories in here right like we're losing margin we're also losing working capital like we're losing here here and here we probably ordered too much inventory sales probably the slow slow down like there's you can you can really contextualize it in a lot of ways so I I like that analogy that you have yeah I to I yeah I totally I totally agree with that a story versus just a set of numbers but it's it's it becomes hard to think that way you know I don't have a formal Finance Financial background I don't have a formal statistical background I just like thinking about the world that way so it became intuitive to me in its own way but I I think like but and it also took like it takes a bunch of years to kind of get going that way let me actually move towards another thing which is um by the way I actually want to ask you about this like a feature question um does Iris actually forecast returning customer Revenue off cohort model for you are you saying yeah that is awesome so it actually takes your Cort data and builds a forecast yeah yeah like it's um it's part of like the revenue model right and like the revenue model being the account receivable model in the cash forecast um like we take uh we have unique identifier cohort for Amazon as well so like you can model like Amazon retention like forecasts um so it's like okay like if I spend $100 how many customers do that get me on a new customer basis that's a forecast for revenue and the second component of Revenue is like the returning customers um and so we have like a bunch of cohort data I don't we don't try to compete with the likes of like lifetim Le or peal like we're not trying to tell you like hey uh you know customer buys product a they're 53% more likely to buy product B within 30 days like that's not the level of insight that we're that we're interested in all I care about is forecasting the Topline Revenue number um and in order to do that effectively you do need like new customers and returning customers are really the two components then wholesale is also but that's not really and you probably need a marketing calendar too actually that's the thing that's always really hard about automated forecasts is like I can I can affect that number if I go from two product releases a year to five and there's no way that in that case the future is fundamentally unlike the past and that can be a real challenge which is like which is where I think the notion of like the marketing calendar um powering uh a lot of the forecast is really important it's also why I think the whole conversation I think that you and Taylor ended up on other sides of which is like who own the forecast marketing or Finance it's like a fun way to kick kick some ideas around on Twitter but it's kind of dumb I think I think like in the sense of like I and maybe you think I'm wrong but I I I mean it's a fun framing but it's like the answer is both obviously like the answer is like you have to be directly connected probably yeah yeah yeah the answer is probably both I think like it starts with marketing the forecast no doubt starts with marketing if I was going to build somebody a financial model for the year of 2024 the first thing I would do is type in the ad spend as the input right yeah that's exactly what I do my yeah yeah my opinion is that like I don't think it should come down to the CMO or whoever being like this is the annual financial plan um so I agree in some ways and disagree in others yeah fair enough I mean I think I think at some point the CMO it's it's actually it's another thing I think is happening is like in all the conversation towards increased Financial sophistication I actually was just talking to a bunch of meta reps like they just like had me for a Q&A and they were like what is what is happening in e-commerce right now what do you think Brands want and I say well like the big difference now from when I started 10 years ago is that it's like the level of financial sophistication is like is so much better at 10 years ago we didn't we literally didn't talk about LTV like it's like we didn't know the customers whoa they make a second purchase you know it's like CRA you know it's just so ridiculous so um um so at that time you know we were so green but now there's like people like you you know with uh building software and you know final Loop and like whatever Taylor's content and whoever it is out that's out there that's like doing different things to try to address these various elements of the financial structure of the business and they're out there um attempting to solve these financial problems for people because everybody knows that they need to get more sophisticated and smarter uh and they also know they need to be profitable and therefore like uh like what's happening is that people are getting more knowledge at the same time it is I think asking too much of CMOS to um really way too much to to be to be the actual cash flow like to to deeply understand working capital my opinion is in the early stages of a business yeah the CEO probably has to know that enough they need to they need to at least have a cash flow model to make sure they don't die uh as soon as the business gets any more complicated and as soon as you add another Channel it becomes like almost impossible for a CMO to to actually drive good marketing I totally and at the same time you know have a extensive working knowledge of working capital it is so much easier so much easier for a finan iial person to understand how cpms and ctrs and AD spend and cacs and aovs and stuff kind of work together like to be dangerous on the Ecom side than it is to like expect you know like someone to like be able to like run a creative team and then like turn around and like manage manage like a supply chain it's like it's like you know like I I'm like dangerous on like the ad side like I know what I'm talking about but like I could never like go and like also like run like a creative operations team and like you know understand like the intricacies of like launching brand campaigns and how that's GNA correspond with like the direct response efforts like that's a dude that's a [ __ ] career in itself and that's the whole that's 45% of the Ecom pnl so like candidly like I don't even think the financial part is like really that it's not more important no I just think it's table Stakes yeah like if you don't have it then like all the all the stuff that like your marketing team is doing and all the efforts that you're doing are almost worthless so like this is like the finance side of the house to me is just like you just have to have it like there is no like if ansor butts and then you can worry about optimizing like we're just going to keep the wheels in the bus you guys got to drive the bus your meta ads tracking can be better and Billy can do it for you Billy is 100% server Sid tracking for your meta ads you will get better event match quality running ads with data quality like it is pre iOS 14.5 the way that I know this is that I'm running Billy as the pixel of choice on all of my clients meta ads at this point and it has been really really good we've seen serious Improvement in event match quality in meta ads we've also seen uh Improvement in roas across the board every time we've tested this including against other thirdparty pixels it has been an obvious win it's also incredibly well priced Billy is not overpriced it is the cheapest Solution on the market that is going to give you better tracking with uh 100% overide tracking like I said so go check out billy. it will make your meta ads better and it will do so in the background without you having almost anything at all it is just an absolute no-brainer if you're running meta ads especially if you are working off of the Native Shopify meta ads pixel integration go get Billy right now get better tracking better data so that your attribution is better in platform the matching is better the data that meta gets is better and you accomplish better results in your ad account so let me ask you another question tangentially related about an area of the business that we really haven't talked about very much uh yet but I am um I am I am Team D Toc is a business model I know many people are Team D Toc is not a business model it's a channel um and uh but I'm team at least in some respect t DTC is a business model and what I mean by that is that there are some particular ways in which that channel which of course it is actually just a channel but uh in which that channel creates certain um possibilities for how to run your business that are unique to the channel in a way that is important to understand and that's really all I care about with that and one of those is um that you can run a dtoc business with a uh with a with an incred incredibly lean team because it scales so well against head count uh it DC businesses can scale depending on the business well in terms of uh margin expansion um with uh ad spend but that really depends on a few things they can scale you get obviously some economy of scale on your supply chain right if you can order in larger quantities with your factory you're going to get at the very least better terms and very likely with enough scale better terms and cheaper pricing but um it does not scale nearly as well as from a standpoint on those elements as it does uh against headcount where like you know I mean I i' I've talked to a business recently I was talking to a guy the other day who's who's got a team of three full-time people and is maybe G to do $20 million this year and is going to do you know five on the bottom line or something like that you know it's like and and they don't I mean they have some agencies and contractors and stuff and stuff like that but they really don't have I mean you know it's just a very small team and that works in Ecom like you it they don't need to add people they could probably get to 40 doing that to be honest um and so um so I'm curious if you think one of the things I hear when I hear you say that like people are spending bad dollars is um is around the adside but I'm curious from your position if you think Ecom businesses um generally are good about this uh in terms of keeping a lean team keeping lean overhead um or if they are or for that matter if you disagree with anything I just said that then you should chime in there but no I mean but are they good at this are they are is there waste in people's opics like you know they no honestly like you're you're right and I don't I don't think it's really even arguable just from like an operating leverage perspective right so like when I so I I have now run like two companies one was a cpg company and this one is a software company the software company is almost exclusively fixed costs right um like our gross margins on Iris are literally 95% um the only uh form of margin expansion for us is revenue growth correct um so our p&l is 90 call it 90% fixed costs uh the that's a very high operating leverage right because if we continue to grow and revenue outpaces expenses we will you know generate earnings very quickly um on the the literally opposite of that is consumer packaged Goods or e-commerce or whatever um in the sense that you have variable expenses is in uh your cost of goods sold that are half your p&l usually um and then you have another 30% of uh variable so like now you're at 80% completely variable expenses before you even get into Opex so like let's just say that like your Opex is 15% that's that's 5% net income so like definitionally like in order for these these Brands to make money they literally have to be leaning on Opex like relatively right because it's like what does lean on Opex mean compared to other business models without a doubt it's probably the leanest you know staff-wise of a business model why is that because it's the highest variable cost structure of any model out there and I think like a good example of of this what what what are the advantages and disadvantages to this um you know a good example is Uber during the pandemic so Uber has a very highly variable cost structure and so when the pandemic hits and nobody in the world takes an Uber for three months well they're actually able to flex their costs down with that Revenue right if iris's Revenue all goes away tomorrow I still have call it 150 Grand of payroll I got to pay a month right so like that's kind of like the tradeoff right is like you know theoretically a software business can generate you know better margins by you know creating better leverage um but we also are less resistant to downturns and that's why you saw like a lot of these like you know series C unicorn just get [ __ ] nuked because there's nowhere to go like you're just screwed because like if you make layoffs if you layoff your entire engineering team you're and then you're just screwed yeah yeah like yeah so yeah you know I I I don't think I would fight anybody who would try to argue with you on that because that is objectively mathematically true yeah and well part of what I mean is like how much margin is left like like you you example of 15 15% of margin getting eaten up in overhead like I what I wonder is like how many Brands could actually get down to 8% you know like could they actually think smarter about that and and have actually a pretty good amount of margin expansion by doing that or 10% or something like that and and I I just don't know like I don't really see that many businesses um and I think most people have some sense of this kind of thing uh that that you need to keep Opex pretty lean but what I but I actually yeah I kind I kind of Wonder If people could be leaner still if they could think better still about this sort of thing you should check the uh the report that we made with wfire we have like a best-in-class like Opex benchmarks um well yeah uh I'll link that in the show notes it's it is a monster report it's like 90 pages I know you put a lot of time and effort took me like took me like 10 weeks to write that yeah that's awesome it's it's really something it's like yeah it's a really it's a really cool report I will link it in the show notes and people should definitely go check that out um so like you can I don't want to misquote it but like you can if you look in there like we literally have that okay cool um yeah I think the lowest I've ever seen in terms of like Opex on like a really scaled brand is probably like six or eight% yeah and those are usually brands that have grown so quickly in the last six or 12 months that they just haven't hired yet yeah um like I think like 10 to like 14% in like payroll specifically is what I'm referring to there's also like rents and softwares and that stuff um 10 to 14% is probably a pretty good Benchmark for like an efficient team could you get down to eight you'd be running on fumes I think like yeah and it also just depends how much you pay people like and like are we going to include like Equity compensation in that you know it's there's there's a lot of questions that you can ask but I um you know I this is my number one sponsor on the show but one of the things uh I've seen some recent conversation around this too um is this is also where like building remote teams people just I think are under optimized around how good of talent there is in parts of the world where you can pay really good money pay relative to local rates um get incredibly experienced uh yeah even in for Iris you know we have um five onshore resources that do development for us um which is like probably a lot for like a software company of our stage but we we use a Ukrainian for like Junior development Ukrainian shop and they are fantastic yeah and they you know they're happy to get paid we pay them a lot yeah but not as much as we would pay for eight more people sitting in San Francisco yep and once you're already a remote team people I just think this is an area where people are are under optimized like if you are remote anyway then there's just in my opinion very little reason not to not to consider you'll find incredibly high quality people people you love to work with all over the place um who are really good and and I'm not saying I'm not talking about exploiting people like pay them good local W wages you know I'm not not saying oh look you find $3 an hour Talent it's like that's not that's not it at all it's like it's just that like local you know obviously the cost of living varies and so once you have access to you know as soon as you hire outside of you know I'm in California as soon as I hire somebody outside of California I might as well do that and so I people who listen to watch the show I I would I would agree I would agree I think it's an under optimized place I think it's where people ought to think from an earlier stage about that element of their business about like that being part of the strategy of growth if you're going to build a remote team there's some real margin to get back there and it's just it's just the exact same conversation app that we applied to the ad spend which is like like you know don't don't don't spend money you don't need to spend you know so yeah yeah 100% um okay look uh this has been really really helpful um I want to do two things left one is any rapid fire financial mistakes that is like top of your head stuff you think brand ought to just avoid that you can just go lightning round quick on um what are the things you see that just like hey go look under these cushions in your business or or even if it's not looking under the cushions it's like uh stop doing X you know uh that would be that would be one question and then after that I want to hear you talk a little B more about exactly who iris is for and why they should get it um I think in terms of like what I see the most of and like what disappoints me and like breaks my heart every day is like when people don't have like a properly formatted accounting Ledger um so like don't neglect your accounting um and don't like neglect your books right because like without the books like you don't understand what's going on unless you have Iris we can tell you what's going on you know but again not a plug yet um and then you need to do so so have your freaking house straight right like don't let some accountant charge you four grand a month to like [ __ ] all over your books every month it's like completely useless the number number two is like don't neglect your financial plan on an annual monthly weekly and daily basis e-commerce is a high velocity Commerce sector [ __ ] changes every single day if you do not understand what you want to happen and what will happen or what might happen you will unless you're you know there's exceptions to the rule but you need to understand hey tomorrow I want to do $10,000 in contribution margin the next day I want to do 25,000 and then the day after that I want 30,000 because all that's going to roll up into my my monthly goal for the month which is 200,000 and that's going to get me that one 12th of the way to my annual goal like this is a stepbystep process so I see so many people that show up to Iris and they're like I don't have an accountant and I have no plan but my row as is two and a half and I am like brother in Christ like you need like so much help like I am but I am but a measly software company like you need like people yeah and then like I think like uh this is like slightly unrelated to like the financial infrastructure side of things I think like pricing is like kind of like pretty brutal for a lot of folks this is a point if your gross margin is 35% you either like don't have a viable business model or B like you're just underpriced so like you can't operate I don't feel and this kind of goes back to your question around like is GTC like a a business model or a CH or just a channel um I think it just depends on your gross margin like if you have enough margin to play around with C then yeah I mean it can it can be a it can be a business model um I don't think there's like a right answer to that question as much as like it just kind of depends which is like a cop out but um for like food and beverage like d Toc is not is not a business model for beauty companies it certainly can be um and like so financially speaking like don't price your product like an idiot um is probably like the third one I guess that I would kind of I think it's really good and then talk about Iris a little bit 52% gross margin you're like well dude like like what's the point of being a beauty brand if you have a 50% gross margin you know right right if it's goop it needs to be it need you need to have more margin yeah yeah yeah yeah right um yeah um what about um what about Iris tell people about I I mean I completely agree with all that and and I actually have sometimes wondered um just one more comment on that uh if some people's um what they think as they hear some of these conversations going around is a cash conversion cycle problem is actually not a cash converion cycle problem it's just a marginal problem like if they just don't have it's like that's the actual issue in their business and so like they can't spend off on ads they have to you know or they're overspending because like it's impossible to achieve a return that you would need at the margin that you have and really it's just all a margin problem um and if you just had more margin you could store a lot more inventory for a lot cheaper so no that's easier said than done right like uh it tends to be the case that the market will squeeze some of that out of different products and some of that but um but uh but I think sometimes that's actually an issue so okay tell me about um uh Iris a little bit more like just just talk about who's like the ideal customer what business stage um who's the ideal customer for IRS if they want to go check out getting more financial um intelligence in their business so we have a pretty wide customer base right now um I think you know like ICP like ideal customer profile wise uh anyone doing one to two 200 million um is in really cross channels it doesn't matter like mad rabbit was a very Omni Channel brand right like a lot of our businesses Walmart a lot of it was Amazon a lot of it was Shopify and I think a lot of the value in iris is that we're you know orchestrating all those Silo data points into like one central warehouse um and so we work amazingly for D Toc Brands because it's it's way easier to get all the data um but I think like where the value like becomes stronger and stronger is for brands that have an Amazon Channel or have a wholesale partner or something like that so basically um if you sell on just Shopify or just Amazon or just wholesale Iris can serve you just as well as as if you're selling across all three um and I think generally speaking there's two Milestones where I've sort of like felt people coming to us and really asking for help um number one is sort of like the million dollar year mark so like you start doing 100K a month or something like that um and then then like this kind of stuff becomes more important like if you're doing less than a million dollars a year I think like you just got to focus on like growing a little bit before you can even really worry about a lot of this stuff um and then once you're at five million I think an iris or something similar uh is just required like that's where that's where the most businesses die right is in between like two and seven million like if you that's like the most critical part like that's where the POS start to get big that's where the working capital starts to get you know burdensome that's where the margins can start to get squeezed like you're in real competition you're a little bit you know you have legs um it's really required understand um you know all the things that we've talked about today so I would say you know one to two I got we have you know Cody from Jones Road is like one of our biggest clients they do you know huge numbers um and then we have brands that are doing under a million dollars a year just because they they like to see the you know they like to see the data um so it's a very it's extremely wide extremely wide customer base but I would say like if you sell consumer products on the Internet or in store like you are within our sweet spot makes perfect sense um okay people can go check that out Iris finance.

Co is that right Drew that's correct yeah awesome link is in the show notes for that I'm just just to be totally clear here I have no affiliate relationship with Iris so uh this was not a SP sponsored podcast episode this Drew is a smart guy building a cool thing and I thought uh I thought it would be helpful for people and I think this was super helpful out the conversation so um so thanks Drew for taking the time and for building something really cool I actually think one of the one of the things I'm I'm extremely bullish on e-commerce I think uh it's a really good industry to be in there's a lot of people who uh it's really easy to talk about the old days or really talk you know cpms used to be whatever um I am bullish on e-commerce one and one of the reasons for that is because there is a level of intelligence that has grown a lot and there's a lot of educational there's a lot of ways to get access that intelligence um that includes communities um you know ECF live or something or ECF rather you know you think of something like that or admission or like there's just like a bunch of different ways that you can get access to really smart people um or even just like free on Twitter and it's unbelievable still there's a lot of really good stuff there you have to sort through more noise now than you used to but like there's still really good stuff there um Drew is tweeting you should follow Drew as well um at Drew Drew fallon2 again link is in the show notes there but another reason I'm bullish on e-commerce is that uh is that actually that the is people like you building software uh into the ecosystem I think the stuff actually does add value to businesses and um and and therefore makes the businesses better it's not it's not just taking margin away from e-commerce businesses is actually doing things that help businesses and makes them better and that makes them grow and that actually helps and so you know you mentioned lifetim earlier it's just like man for 100 bucks a month you could get a lot of intelligence about about what's going on in the LTV in your business that's $100 worth paying you can make that money back really fast and I think it's it's you know very possible that iris is another um is another player like that and so anyway I'm happy to have you on and hear about it because I think this kind of stuff really makes people's businesses better as long as uh you guys got to go deliver now on the promises that you've made which is is not up to me that's up to you yeah that's exactly right yeah so I have a a pretty uh strong Vendetta or whatever the right word is motivation to be like I love how lifetime Le is like the best like value to price and like I don't know like we we'll never be a 100 bucks a month um but like that sort of ethos really resounds with me which is like just like if you're worth more than what you charge like you will have a great business you know and like also like the former Merchant in me is like I don't want to pay a ton for software um so like right we're reasonably priced kind of a steal honestly which is like also part of why like so many people are coming to us because like the alternatives are like 50 Grand a year 100 Grand a year like we have you know if you wanted to spin up a tableau or some sort of like bi instance that would like give you this kind of stuff you would spend half a million sometimes yeah um so yeah that's a all right man thank you appreciate it yeah thanks Andrew thanks for having me a [Music]